Costco (COST) Q3 2026 earnings review
Top-Line Acceleration Masks Underlying Margin Shift
Costco delivered an objectively phenomenal top-line quarter, with Net Sales growth accelerating to 11.6% YoY—a massive step up from the mid-single-digit levels seen over the past year. The bottom line matched the excitement, with Net Income surging 15.2% to $2.19 billion ($4.93 EPS). However, beneath the headline beat, a deeper shift is occurring. Gross margins compressed roughly 20 basis points YoY, entirely offset by sudden and sharp SG&A leverage and a surge in high-margin membership fees. Costco is leaning heavily into price investments to drive volume, funding these cuts through operational efficiencies rather than core merchandise leverage.
🐂 Bull Case
Digitally-enabled adjusted comparable sales grew 20.8%, marking the third consecutive quarter of >20% growth. The app and personalization investments are permanently elevating the e-commerce baseline.
After quarters of wage investments weighing on profitability, SG&A as a percentage of net sales dropped ~21 bps YoY (8.95% vs 9.16%). Tech-driven throughput is finally outpacing wage inflation.
🐻 Bear Case
Gross margin contracted to 11.04% from 11.24% a year ago. What makes this alarming is that Q3 last year included a $130M LIFO charge. Core merchandise margins are taking a hit as Costco aggressively invests in price.
The earnings release omitted membership renewal rates. Given the slight 10 bps sequential declines observed in both Q1 and Q2 due to digital sign-up mix, this remains a critical missing piece of the health check.
⚖️ Verdict: 🟢
Bullish. Double-digit top-line growth for a company of Costco's scale is exceptional. While gross margin compression is a concern, the tandem of SG&A leverage and the membership fee flow-through proves the model's ultimate durability.
Key Themes
Sales Growth Trajectory Hits Escape Velocity
Accelerating. Costco broke out of its 8-9% holding pattern with a decisive 11.6% YoY jump in net sales ($69.15B). Even excluding gas and FX, total company comps accelerated to 6.6%, led by a powerful 6.8% showing in the US. This confirms that recent price investments (notably on Kirkland Signature items) are successfully driving immense unit volume.
Digital Modernization Sustains 20%+ Growth
Stable (at a high level). Digitally-enabled adjusted comps clocked in at 20.8%. Over the past three quarters, Costco has proven that its technology overhaul—spanning personalized product recommendation carousels, a modernized app, and expanded Costco Logistics—was not a one-off bump. E-commerce is now a reliable, structural growth engine.
Gross Margin Contraction Defies Base Effects
Reversing. Based on reported figures, gross margin (Net Sales minus Merchandise Costs, divided by Net Sales) fell to 11.04%, down ~20 basis points from 11.24% in Q3 FY25. This is a red flag because Q3 FY25 included a massive $130M LIFO charge that depressed margins. For margins to contract further despite lapping that charge, Costco must be aggressively lowering everyday prices (EDLP) or suffering negative mix shifts.
Fee Increase and Tech Investments Rescue Profitability
Accelerating. The margin contraction was entirely neutralized by two factors. First, membership fees grew 10.7% to $1.37B as the September 2024 fee hike continues to compound. Second, SG&A rate dropped roughly 21 basis points YoY to 8.95%. Management's prior commentary regarding automated checkout prescan technology and pharmacy AI inventory management is tangibly translating to the bottom line, offsetting earlier wage hikes.
The $19 Billion Question: Capital Allocation
Stable. Total cash and equivalents ballooned to $18.9B, up nearly $4.8B since the end of FY25. During the Q2 call, management warned that while cash is high, the elevated stock price makes a special dividend extremely expensive on a yield basis. This growing cash hoard in an uncertain macro environment puts pressure on management to deploy capital efficiently without resorting to value-destructive M&A.
Renewal Rate Black Box
Without the earnings call transcript, we are missing the crucial US/Canada renewal rate metric. Management spent Q1 and Q2 defending consecutive 10 bps sequential drops (down to 92.1%), blaming a younger digital cohort. Investors must monitor whether this stabilization occurred in Q3 or if the leaks in the membership bucket are expanding.
Other KPIs
Accelerating. Up 11.2% YoY from $2.53 billion. Operating profit grew perfectly in tandem with top-line sales, underscoring that while the components of profitability (Gross Margin vs SG&A) shifted wildly, the underlying machine remains perfectly balanced.
Accelerating. Up 82% YoY from $85 million. As Costco's cash pile swells toward $19 billion, interest income is becoming a non-trivial contributor to pre-tax income, padding the bottom-line beat.
Accelerating. The unadjusted comp of 9.8% dwarfs the adjusted 6.6% figure, implying that gas prices and FX were material tailwinds to the top-line this quarter, unlike the deflationary headwinds experienced throughout FY25.
Guidance
Stable. While Costco does not provide forward financial guidance in its earnings releases, previous Q2 commentary established a target of 28 net new warehouse openings for FY26. With 931 locations currently operating, the company must execute heavily in Q4 to hit its end-of-year target of 942.
Stable. Previously guided in H1 FY26, this represents a massive step up from the $5.5B spent in FY25, highlighting aggressive reinvestment in real estate, automated checkout pay stations, and logistics networks to sustain recent volume surges.
Key Questions
Gross Margin Contraction Source
Gross margin fell ~20 bps year-over-year despite lapping a $130 million LIFO charge. Exactly how much of this compression was due to proactive price investments in Kirkland Signature vs. a negative mix shift or gas profitability fluctuations?
Membership Renewal Stabilization
Did the US and Canada membership renewal rate finally stabilize from the 92.1% reported in Q2, and are the targeted digital communications to younger cohorts yielding improved retention?
Capital Allocation Constraints
With cash and equivalents near $19 billion, is the board actively reconsidering the criteria for a special dividend, or are there new, capital-intensive M&A or real estate strategies being evaluated to deploy this cash?
Tariff Strategy Updates
In previous quarters, management described the tariff situation as 'extremely fluid.' What specific actions were taken in Q3 regarding supply chain rerouting or forward-buying to protect H2 FY26 margins?